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Freshpet: An Overvalued, Bad, Bad Dog

by Sonya Colberg, Senior Investigative Reporter - 12/11/2014 9:48:32 AM

By Sonya Colberg, TheStreetSweeper Senior Investigative Reporter

Pet food company Freshpet (FRPT) jumped out with an IPO last month and shares fetched a surprising $20 the first trading day.

Freshpet loses money as it installs and maintains refrigerators in stores to display its natural, slightly cooked dog food.

The New Jersey company released numbers late Tuesday showing its $0.14 loss exceeded analysts’ $0.12 expectations on revenue of $22.5 million. Consequently the stock dropped, followed by a jump to about $19.

But we’ve pawed through Freshpet’s numbers and were astonished to determine how many dollars the company makes per fridge:

About $19.57 per day.

That’s less than a $27.49 tube of Freshpet Vital.

So a company that the market says is worth over $600 million sells the daily equivalent of one meat tube per fridge.

And, according to the conference call, Freshpet’s expecting that figure to reach only about $21 to $22 at the end of 2015.

So it appears this money-losing company is all but certain to continue losing money.

At the core of that issue, TheStreetSweeper has dug up three overriding challenges facing this 10-year-old Secaucus, N.J. company.

And we believe the overall challenges make this stock worth less than one-third its current price.

1: Competition is fierce, huge players now penetrating the niche.

Overall, mass-market pet food sales have become stagnate.

That’s according to Pet Food in the U.S., 10th Edition, a significant market research study.

Numerous big producers – even Walmart and Whole Foods, some of which carry Freshpet - have consequently stepped onto the natural pet food bandwagon with their own store brands, the study states. The study also notes:

“With Hill's reformulating Science Diet as a natural product, Walmart launching Pure Balance as its first natural pet food store brand, NestléPurina coming on strong with Purina One Beyond, Merrick … acquiring Castor & Pollux and obtaining organic certification, and Del Monte acquiring Natural Balance, everyone is stepping up their game to take advantage of the natural boom.”

As more pet food companies go after well-heeled, picky pet owners, Freshpet lacks strong brand recognition, a factor the CEO alluded to recently.

Healthy Spot organic dog food stores, in five California locations including ritzy West Hollywood and Santa Monica, draw wealthy customers who will spend the money to pamper their pets.

“Cleo is one of those pretentious eaters. She likes goose,” associate Kristine Kobe said with a laugh of her 8-year-old Jack Russell-Chihuahua.

The upscale boutiques’ fare includes three refrigerated natural dog food brands. Primal dog food like Ms. Kobe’s pooch eats when she isn’t sneaking a discarded French fry, along with Stella and Chewy’s, and Small Batch.

What about Freshpet?

“Freshpet? That doesn’t sound like a name that has come up before in my training,” said Ms. Kobe.

Freshpet is lost on a treadmill of natural pet food brands.

There’s a whole variety of different brands and flavors and protein sources,” of frozen/refrigerated quality food for pets, said veterinarian Dr. Karen Becker.

Another product in the niche is Blue Buffalo, which apparently backed off a reportedly poised 2014 IPO following the false advertising lawsuit filed by NestlePurina.

The lawsuit is another alarming signal for tiny Freshpet showing that big players won’t hesitate to go after small companies so they can claim the niche as their own.

2: Stinky, prohibitively expensive food at ~$10 per day for a larger dog. Not easy to feed and store safely, some pet owners believe Freshpet food made their pets sick.

One reviewer warns that her dog didn’t finish eating the food until the next day and became so violently ill that it nearly had to be euthanized.

“I e-mailed the company to question how long I can let the food sit in her dish, because this was the only thing that I changed before she got ill.  I received word back about a week later telling me not to leave it in their dish for more than an hour.

While many reviewers said their pets like the food, many others object to the killer price tag (~$17-$27 for 6 pounds versus Purina Smart Blend natural dry ~$23 for 16.5 pounds). One reviewer said Freshpet “must be on crack!” and “It’s $7.98 for 2 lbs.”

And Freshpet frequently claims its food is preservative-free.

“We have no preservatives. The only preservative is the refrigerator,” said Richard Thompson, Freshpet’s CEO.

However, Freshpet does contain salt and sodium selenite, an inorganic salt and supplement that can be toxic, like other minerals in high doses, even deadly.

And salt is an age-old preservative. In fact, competitors offer brands that do not add salt.

Indeed, salt can be a problem in pets as well as humans, as documented below.

“Animal studies have shown that increasing salt intake increases the amount of protein excreted in the urine and markedly increases the rate of deterioration of renal function in experimental forms of renal disease. Studies where salt intake has been reduced in animals with experimental renal disease show a slowing of the rate of progression of the disease.”

One former customer blames the salt, though it’s within standard levels, for worsening a pit bull’s heart condition over time and ultimately killing the dog.

3: Freshpet stock is expensive. Even management values it at $5.

Even Freshpet – which could release millions of shares held under 180-day lockup in just over four months - considers its stock worth about one-third of the $15 per share value in its initial public offering.

That’s right. Just two weeks before its IPO last month, Freshpet signed a $62.5 million revolving loan deal that set the stock’s value at $5 and change, as shown in its US Securities and Exchange Commission filing, below:

“Based on the factors above, the Board of Directors determined that the Series C Preferred Stock fair value was unchanged at $5.25.”

And the valuation specialist hired to help Freshpet determine the fair value of the common stock was more brutal:

“The valuation specialist determined the fair value of our common stock at February 6, 2014 was $0.88 per share.”

Conclusion:

With Freshpet shares around $19, the market value has rocketed to over $600 million.

But TheStreetSweeper believes nobody with any sense would ever pay nearly 10 times its $62 million in sales for a company that is losing money.

Even $5 per share – a $160 million market value - sounds absurdly generous for a company with such an unworkable plan built on ridiculous numbers.

It’s time to send this dog out the back door.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in FRPT and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to  scolberg@thestreetsweeper.org.

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